If you start to get sick, you can usually nurse yourself back to health with chicken noodle soup and Netflix. When your business is sick it won’t recover on its own. You’ll have to be strategic and make some major changes. Here are a few simple ways you can make sure your small business in good financial health from the start and take action if you’re heading in the wrong direction.
Watch your income like a hawk.
More than 80 percent of failing small businesses can blame—at least in part—a lack of proper cash flow management. That’s when on paper, your revenues may exceed your costs, but in practice, the timing of both leads you into insolvency. This makes monitoring your monthly revenue and costs a top priority for financial health.
A quick way to gauge your overall health is to check your cash position at the end of every month and compare performance quarter over quarter to make sure you’re building positive growth. Even a few percentage points of month-over-month or quarter-over-quarter growth is a good sign. You can track your cash flow growth using apps like Float or an Excel spreadsheet.
Finally, check the timing of your revenue and costs. Make sure you aren’t expecting an influx of costs without sufficient revenues or savings to pay them off. When you need liquidity quickly, consider calling your suppliers and asking for an extended payment term, or even factoring your invoices with services like Fundthrough.
Don’t ignore your receivables.
It’s all well and good to sell your services in abundance, but if you don’t have efficient billing … you’ll still be broke. In other words, don’t let your accounts receivable go stagnant. Send out invoices promptly and have a process for follow-up and collection. FreshBooks makes it easy to send regular, professional invoices and track what remains outstanding. The smoother your billing process remains, the more likely you are to have a healthy cash flow. Easy billing can keep your customers and vendors happier, which will strengthen your professional relationships and ultimately your financial security.
Think smart about inventory.
Do you sell physical products? If you have too much inventory, you’re burning money on unnecessary storage. On the other hand, not having enough product on hand could cause unnecessarily stagnant sales growth. Start tracking your sales meticulously so you know when to increase production. It’s also important to have solid real-time inventory tracking, so you don’t oversell by a huge margin—canceling orders or sending out super delayed packages will harm your brand and could hurt your long-term financial health.
Set low debt-to-asset ratio goals.
As a new business owner, it’s normal to take out loans or get financial investors. It’s not easy to get off the ground on your own—we get it. Still, setting a low debt-to-asset ratio and making concrete plans to pay down debt is crucial to financial health. This ratio represents how much your business owes to debtors versus what it is worth. Maintaining a 2:1 ratio or lower is the best practice. How can you aim to reduce your ratio? Make specific plans to increase revenue (such as marketing to reach new customers) and have a strategy for improving your profit margin over time.
Keeping your business finances healthy takes a lot more work than getting a flu shot. If you’re a startup owner and you see kaleidoscopes when we talk about things like debt-to-asset ratio, start with this Financial Health Checklist. When you’re following the right metrics, you’re starting on the right foot.